Recent Market Sell-Off Comments
- The recent sell-off started in China with concerns about economic growth rates and the impact China slowing may have on the rest of the global economy. The immediate impact was on commodity driven economies and commodity assets but the selling pressure has moved from emerging markets to Europe, Japan and now the U.S. market.
- We view the initial decline in assets as a rational response to weaker growth and concerns over China’s economy, but the more recent drops may be excessive especially in non-China markets.
- Fears about the Fed raising short term interest rates in the U.S. further fueled concerns about global growth and the already strengthening dollar. The stronger dollar has already begun to impact U.S. multinationals as evidenced in recent earnings reports.
- These concerns have occurred against a back-drop of elevated equity P/E ratios (some analyst asserting above-average P/E ratios) making equities more susceptible to bad news.
Current Market Environment
- Global equities are now trading at cheaper valuations without material disruptions to growth fundamentals and without any major shift in the developed nations monetary and fiscal policies.
- U.S. growth fundamentals seem reasonably stable with important segments like housing and employment showing steady improvement with little risk of a near-term recession.
- Europe and Japan growth fundamentals also seem stable over the coming 12-18 months. Policy makers in both Europe and Japan appear to have additional support ready and at their disposal if growth seems to be threatened.
- Corporate balance sheets and U.S. consumer balance sheets are in good shape with ample liquidity; some of which may enter equity markets as prices have cheapened. Cash holders still have very limited options given the historically low interest rates and are actively seeking a more attractive rate of return.
Conclusion
- We believe the recent sell-off is a “normal” market correction and not the beginning of a broader systemic problem.
- The global banking system is not seeing problems nor are we seeing problems with overnight borrowing facilities. These facts give us more confidence this is a correction and not a signal of a more serious systemic problem.
- We continue to favor a diversified approach to our investment portfolios but would use this opportunity to increase any equity allocations that are currently underweight the appropriate threshold.
- With U.S. interest rates backing up as investors seek safety, we would not hesitate to sell interest sensitive bonds if you are overweight and re-allocate the proceeds to more risk assets (equities and hedged equities).
- Continue to keep a long term perspective on your investments and be disciplined in your buy and sell decisions. Ensure your investment allocation decisions are driven by long term goals and objectives and not short term market action.